These days, investors are looking for fruitful opportunities that also offer a high margin of safety. Ever since the pandemic, the market has been restless, with new uneasiness emerging consistently. However, one investment that appears to be offering such a much-needed margin of safety and whose future performance should be largely uncorrelated to economic headwinds is Altria Group (NYSE:MO).
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In my view, Altria’s ability to deliver stable profits and hefty, tangible capital returns to investors during the ongoing market turmoil should comprise a strong safety net that could result in a notable upside ahead. Accordingly, I am bullish on the stock.
Unfazed Sales Despite Growing Concerns
Historically, tobacco companies like Altria have been closely linked to a number of concerns. The market has been bearish on tobacco stocks for decades now, citing worries about a dwindling number of smokers that overshadows the industry’s otherwise robust financials.
In its most recent earnings report, Altria once again demonstrated that it can deliver strong sales and growing profits, going against the mainstream narrative of its upcoming demise. For Q4, the company posted net revenues of $6.11 billion, only 2.3% lower compared to the prior-year period.
The small decline in net revenues was due to weaker shipment volumes, partially offset by higher pricing and a decrease in promotional investments. So, while smokeable sales are on a broad decline, the situation is nowhere near the catastrophic portrayal the market tends to push.
When we look at Altria’s full-year revenues for smokeable products, they were only down by 1.7%, with price increases almost completely offsetting the 9.7% decline in domestic cigarette shipment volumes. Of course, rising prices against declining demand for cigarettes is not a sustainable strategy. It can only last so long. However, given that there will always be a certain amount of smokers out there, there should be a point at which Altria’s shipment volumes stabilize, alleviating the need for regular price hikes.
Profits are Growing
Since nobody really buys Altria for its revenue growth potential, it’s much more meaningful to assess the company’s profitability. After all, Altria’s profitability will determine its future dividend capacity, which is the element the majority of future shareholder returns will be determined upon.
In Q4, the company posted adjusted diluted earnings-per-share growth of 8.3% to $1.18, largely driven by a lower share count, an increase in operating income, and a decline in interest expenses. Strong profitability in Q4 and throughout 2022 drove adjusted diluted earnings-per-share growth of 5% for the year at $4.84.
Altria’s strong cash flows, cost-cutting initiatives, ongoing deleveraging, and share buybacks should continue propelling earnings per share further, as indicated by management’s Fiscal 2023 guidance. For this year, management expects adjusted diluted earnings per share to be in the range of $4.98 to $5.13, suggesting a growth rate between 3% and 6%.
Overall, Altria’s ability to generate growing profits with a high degree of predictability during such an uncertain environment is a very promising sign for the continued expansion of the company’s already hefty dividend payouts. This then leads us to why the stock offers a significant margin of safety.
Dividends & Buybacks Offer A Wide Safety Net
Altria’s hefty dividends and buybacks should offer a wide margin of safety for current shareholders. Dividends offer a tangible capital return that improves predictability when it comes to the stock’s future return potential. Further, the 8.1% yield essentially forbids bears from shorting the stock (it would be incredibly expensive to do so). This is reflected in Altria’s <1% short interest, despite the negative sentiment encircling the stock.
In the meantime, Altria’s continuous buybacks should also contribute to the overall margin of safety embedded in the stock, as (besides contributing to earnings-per-share growth and, consequently, improved dividend coverage) they imply enhanced share buying volumes that create a floor price for the stock. This is observable in the fact that shares of Altria trade with considerably less volatility compared to the overall market, as the stock’s ~0.6 beta indicates.
Is Altria Stock a Buy, According to Analysts?
Wall Street appears to have mixed feelings about the Altria Group’s investment case, with the stock having a Hold consensus rating based on two Buys, four Holds, and one Sell assigned in the past three months. At $47.42, the average Altria Group price target implies about 3.3% upside potential.
The Takeaway
As Wall Street’s sentiment suggests, Altria is a polarizing stock. That said, it’s hard to ignore the company’s profitability and capital returns prospects, which appear to be in their best shape ever, despite the concerns surrounding tobacco companies. Altria achieved an all-time high in adjusted earnings per share last year, while management’s optimistic guidance points to another record in Fiscal 2023.
In the meantime, the 8.1% yield and serial buybacks should provide a wide margin of safety for current investors while enhancing the predictability of the stock’s future returns. This set of features is particularly valuable amid today’s volatile market conditions, which makes me believe that investors will eventually recognize Altria’s qualities and drive the stock to greater heights.
